Climate Change Groups Split on Fossil Fuel Divestment

Coal miners in Donetsk, Ukraine. Image via AFP Photo.

A rift is emerging among investors in some of the world’s biggest energy companies over a global campaign that aims to combat climate change by making fossil fuels as unpopular as tobacco.

Over the past seven months, investors including the heirs to the Rockefeller Standard Oil fortune and the board of trustees at California’s Stanford University, have decided to avoid shares in coal companies.

Some church groups and the University of Glasgow have gone a step further and said they will shun all fossil fuel investments amid a grassroots campaign based on the 1980s divestment movement that pushed South Africa to end its apartheid system of racial segregation.

Altogether, institutions and individuals responsible for at least $50bn of investment have said they will sell some or all of their fossil fuel holdings.

But other investors concerned about global warming say it is better to hang on to shares in oil and gas companies such as Royal Dutch Shell and ExxonMobil, or coal groups such as Peabody Energy of the US, and use the holdings as a way to engage directly with companies to encourage them to adopt more climate-friendly strategies.

“The idea that shaming an industry will somehow reduce greenhouse gas emissions is not correct,” says Jonathan Naimon, managing director of Light Green Advisors, a New York asset management firm that specialises in environmental sustainability investing. “It isn’t like divestors are bringing any solutions to the table.”

“It’s actually projects and technologies that reduce emissions and the people developing them are in energy supply companies as well as energy-using companies,” he adds.

Mr Naimon points to work his firm had done with Ford Motor Company to encourage it to make hybrid sports utility vehicles, which are now part of New York City’s taxi fleet.

Norway’s huge $845bn oil fund appears to be moving towards a similar position. A panel set up to advise Norway’s finance ministry on whether to sell out of coal and oil companies counselled against such a move in December. It said active ownership of, and engagement with, fossil fuel companies on climate change was preferable.

A similar argument has been made by the largest public pension fund in the US, the $299.4bn California Public Employees’ Retirement System, which also points out it has a fiduciary duty to meet its financial commitments to members.

Harvard University has also repeatedly rejected student and faculty pressure to sell its fossil fuel holdings, a move its president, Drew Faust, has said would not be “warranted or wise.”

But Bill McKibben, the US environmental activist and writer who co-founded the 350.org
climate campaign group spearheading the divestment push, says engagement strategies only suited some companies.

“If we have a problem with Apple paying Chinese workers bad wages you don’t need to throw away your iPhone and boycott Apple stock. You need to put pressure on them so they pay people better and the price of an iPhone goes up a dollar and everyone’s happy,” he says.

But he argues fossil fuel extraction companies are a very different case because their value is so dependent on their reserves of oil, gas and coal. “There’s no way that engagement can persuade them to get out of this business as long as it remains a profitable business,” he says.

“The idea that anyone else is going to merrily persuade Chevron or BP that they want to be in the renewables business or something is nuts,” he says. He argues this would only happen with government pressure and that in turn would require the dilution of energy companies’ political power by efforts such as the divestment movement.

Mr McKibben’s campaign was inspired by research from a London-based think-tank, Carbon Tracker, showing that the best way for the world to avoid dangerous climate change is to keep from using most of the known oil, gas and coal reserves. The think-tank argues that climate change pressure groups could turn such holdings into “stranded assets” as their value falls.

But Carbon Tracker itself does not recommend a pure divestment strategy.

“We’re not advocating blanket divestment,” said Anthony Hobley, the group’s chief executive. “We think both engagement and divestment together will achieve more. The sum is greater than the parts because either alone isn’t going to achieve the ultimate objective of a climate-secure energy system.”

The divestment movement may not have persuaded the world’s largest investors, but the idea of stranded assets has provoked an unusually public response from Shell,

ExxonMobil, Norway’s Statoil and other big oil and gas groups this year.

They argue investors should not be concerned that the divestment movement will push down values because demand for energy is strong and renewable energy sources are unlikely to be a realistic alternative to fossil fuels for many decades.

But pressure on the industry is unlikely to go away.

Among the measures some countries are proposing for a global climate deal due to be agreed next year is a plan that would lead to fossil fuels being phased out as early as 2050. Other nations will oppose this move but a later deadline for eliminating the use of oil, gas and coal is likely to stay on the negotiating table for much longer than the industry would like.

Churches join the fossil fuel debate

The world’s churches have become an arena for the debate over whether it is better to tackle global warming by divesting from fossil fuel companies or by holding shares and engaging with energy groups to spur more climate-friendly business models.

The World Council of Churches, which represents around 560m Christians in 140 countries, has adopted a divestment strategy for its SFr16.7m investment portfolio. Its finance policy committee decided in July that fossil fuels should be added to the list of sectors in which the council would not invest.

“The use of fossil fuels must be significantly reduced and by not investing in those companies we want to show a direction we need to follow as a human family to address climate changes properly,” said Rev Dr Olav Fykse Tveit, WCC general secretary.

But the Church of England, which has an investment portfolio worth around £9bn, has opted for engagement. It announced last month it would use its stakes in Royal Dutch Shell and BP to urge the companies to cut their carbon emissions and invest more in renewables.

The Church of England has about £100m invested in Shell and just over £50m in BP and plans to file shareholder resolutions asking both companies to take greater action to tackle climate change.

“Church investors have an excellent record of achieving change through engagement, including on climate change issues,” said Edward Mason, head of responsible investment at the Church Commissioners, the denomination’s endowment fund.

More than half the 53 major British companies that the endowment fund engaged with in 2014 had improved the way they disclosed and managed their carbon emissions, he said.

A University of Edinburgh academic who assessed the engagement strategy concluded “with a 95 per cent degree of certainty” that these improvements were due to the influence of church investors.

Via Financial Times. Original article: http://www.ft.com/cms/s/0/5ca02a4c-8792-11e4-bc7c-00144feabdc0.html#ixzz3NyClsEXN

What We’re Reading: Resource Revolution

By Jon Naimon (Light Green Advisors) and Scott Fenn (MSCI, formerly IRRC)

Is a quiet revolution to make productive use of resources underway? Matt Rogers and Stefan Heck of McKinsey and Co. make a persuasive case that leading companies are revolutionizing the way that we make use of physical resources such as energy, whether oil or solar, and materials used for products.

This “resource revolution” claims that just as technological advances increased the productivity of labor tremendously in the last generation, innovative new technologies will increase the productivity of resources over this generation. Is this resource revolution, along with climate change, the greatest wealth-creating opportunity of a generation, or just another incremental step?

The book has three basic premises: first, that technology is behind each progressive change in energy resources; second, that leading companies, by dint of creativity, testing, and hard work, are opening up new markets and changing the way products and services are delivered; and third, that a series of challenges can be expressed in the form of future model companies designed to spur entrepreneurial activity.

The climate change debate has for years been dominated by a pessimistic perspective first penned by Thomas Malthus, a British clergyman, and adopted in part by former Vice President Al Gore. This model suggests that earth is a sinking ship destined to sink because of intractable problems linked to our consumption.

The McKinsey team, dissecting previous “revolutionary” transitions, points out that the Malthusian cataclysm hasn’t occurred due to improvements in technology and, in particular, new applications of technologies that permit more needs to be served with fewer resources. This historical perspective is quite helpful to put in context our current resource dilemmas and to help see the vital importance that businesses play in solving problems.

The second part of the Resource Revolution book highlights the individuals and firms that have led the most recent resource revolutions. George Mitchell from Mitchell Oil pioneered hydraulic fracturing or “fracking,” which has changed the U.S. from a major oil and gas importer to an exporter of natural gas and the largest worldwide petroleum liquids producer in less than a generation. Elon Musk has stood the auto industry on its head with a luxury electric car that is a pleasure to drive. The solar industry, which has grown over 1000% in the past 10 years, is also described.

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Internal combustion vehicles are notoriously inefficient.

One slight inaccuracy is the emphasis on the innovations of California solar firms, when third party solar financing was pioneered some 5 years earlier by an East coast firm, SunEdison, which is still one of the nation’s largest on a megawatt basis. Another perplexing element is a downgrading of the contributions of various large firms that developed advanced technologies — such as LED lighting — that have subsequently been adopted by smaller firms such as CREE.

The third section of the book sets out some model business opportunities for entrepreneurs based on the authors’ core principles, such as “the common themes of reducing one way resource flows, increasing circularity, and using digital tools like object-oriented programming to reduce waste and provide greater consumer choice.” Top opportunities identified include a net-zero decentralized energy company and a “tertiary recovery” oil and gas company.

Over the last 15 years, we at LGA have evaluated companies in terms of their ability to integrate these Resource Revolution concepts into products and services offered to the public. We see plenty of evidence that many large firms have improved their resource productivity tremendously over the last decade. A subsequent blog post will go into some of the companies LGA sees that have already started converting on the opportunities laid out in Resource Revolution.

Resource Revolution, by Matt Rogers and Stefan Heck of McKinsey & Co., is a worthwhile and insightful book that goes far to explicate the massive business opportunities associated with the challenge of providing energy and consumer lifestyle choices to 2.5 billion new global middle class customers—largely in the developing world. It is also a good tonic for both the new age fantasy that better attitudes will solve problems and the pessimism of Malthus that all is lost since technology is fixed and population is rising. It is a book that should be read not only by the CEOs that are McKinsey & Co.’s natural audience, but also by NGO executives and by investors, who will provide the financial resources that serve as fuel for companies to build a more resource efficient tomorrow.